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Sunday, June 3, 2012

Is Facebook Advertising a Fraud?

A few weeks ago, Facebook launched its Initial Public Offering (IPO). Since then the stock has tanked from $38 a share to a perch in the high $20’s, which is a significant financial haircut for those who paid the IPO price.

Complicating things, General Motors announced the day before the IPO that it was discontinuing its $10 million commitment to Facebook advertising on the grounds that it was not working for them. Some people seem to be linking the poor early performance of Facebook shares with its viability as an advertising medium. I canvassed a number of people at conventional and digital agencies across the country and came up with some interesting findings.

First, the General Motors (GM) issue. Almost immediately after GM’s announcement of their Facebook pullback, the cable business channels had some serious digital players on talking about the decision. They generally said that perhaps the reason things failed for GM was that they were not using Facebook properly. A few of my panel members echoed that sentiment as well and then a Ford spokesman made the rounds saying that Facebook was working just splendidly for them.

I have no way of knowing if GM did not execute properly. A lot of the hoopla may be just because the investment bankers set the IPO price too high. Additionally, problems in Europe, particularly Greece and Spain, plus a miserable jobs report in the U.S. on June 1st have roiled markets and hit the majority of stocks negatively.

When you talk to young people and I speak with hundreds, they almost all use Facebook. It is perfect social medium for them. Many tell me that if a friend mentions a film that they like on their Facebook page, they are far more disposed to go to it. Young professionals in the bigger cities say it helps them screen restaurants and bars. “If a friend says that a particular place is a great spot for brunch, you can bet that I will check it out”, a young New Yorker writes. This is the most powerful form of advertising, word of mouth, and it is free!

Here are some composite comments from a wide variety of people regarding paid Facebook advertising.

“We like to put a promotional app (i.e., sweepstakes, etc.) on a brand Facebook page and use Facebook ads to draw participation and hike “likes.” What is a like? Simply put, it is an option on the Facebook web site that allows you to provide feedback on stories that appear in a friend’s or company’s news feed. You can be positive without adding any additional commentary. A lively debate is going on in media circles about how to evaluate the value of “likes”, but clearly a high number is beneficial.

Another media director says that smaller clients can get the word out about promotions very cost effectively and with some pinpoint targeting in terms of demographics, geographic region, interests and sometimes even if they use a competitive brand.

Several people mentioned that a company Facebook page is a great way to build a database and metrics such as cost per visitor and cost per name acquired can be calculated when they give out coupons or special promotions on the company page.

An unusually thoughtful observer who entered the digital game quite early relative to most of us, wrote that Google Display Network (GDN) outperforms Facebook on all metrics and reaches far more people than Facebook. At the same time, he stresses that you can get more frequency with Facebook as users spend more time with it than Google (it seems that we can never escape Reach & Frequency!).

He goes on to say that “unlike GDN, Facebook does not offer mobile advertising, retargeting, contextual targeting or advertising on partner sites”. He also stressed that Facebook mobile ads cannot be far away. Most of feel that most likely it will be mobile advertising that will be a key linchpin in global advertising going forward

More than one commented to the effect that Facebook needs to figure out how to get their advertising growth to keep pace with the increase in their user base.

So, is Facebook advertising a rip-off? It would appear not. Just make sure that you are in experienced hands that have the analytic caution to use it wisely and evaluate results objectively. And, remember, more competition is coming over the next few years from companies that probably do not exist now.

Warren Buffett, the greatest investor of the 20th century, has often said that over time a stock’s price will reflect a company’s performance and prospects. But sometimes, it can take years to get there. Facebook is run by smart people who are likely working furiously on improvements to their advertising business model. Forget about the day-to-day fluctuations in the share price and focus on what they can do for you and your clients.

Finally, keep in mind that we are still trying to determine how different media types work together after one hundred years of trying. Isolating Facebook’s effectiveness is difficult and it should never be bought in a vacuum. An old friend who has reinvented himself as a digital media director puts it beautifully: “No one that we do it for uses Facebook exclusively. It is always a component of a broader mix of digital options.”

If you would like to contact Don Cole directly, you can reach him at doncolemedia@gmail.com

About Me

Don Cole has been a media analyst for over 40 years. He was a media director and partner at Doner and Moroch and worked at two other agencies plus Arbitron.
His focus with this blog will be to discuss the rapid changes going on in the advertising industry and especially its impact on broadcast TV, cable TV, and mid-sized and smaller ad agencies.
Don is available to consult or to speak to your organization on a wide variety of topics.